THE NEXUS BETWEEN FINANCIAL DEEPENING AND ECONOMIC GROWTH IN NIGERIA: ARDL & CAUSALITY APPROACH

This paper examines the dynamic causal relationship between financial deepening, economic growth, and four other macroeconomic variables in Nigeria for the period 1981–2014 using principal component analysis for the construction of the financial development indices, Auto-regressive Distributed Lag (ARDL) and the Granger causality approach. Our results are in three folds: First, the causal effect of stock market development on economic growth is found to be positively significant in the long-run and short-run but bank sector development is found to be positively insignificant suggesting the weakness of financial intermediary sector in resource mobilisation and allocation in Nigeria. Second, this study find no causality running from economic growth to financial development in both at the long run and short run positions. Third, the causal effect of macroeconomic variables on finance-growth nexus is found to be uni-directional in the long-run, suggesting that crude oil price and government expenditure are the key driver of long-term development of the Nigerian financial sector and as such among the underlying factors that determine the amount of economic activities passing through the Nigerian financial sector. The policy recommendation is to make banking sector more accessible to enhance financial deepening and indeed a policy that will encourage diversification of the economy rather than solely dependence on oil revenue.